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Is the market rigged?

January 20, 2013

Farmers carry newly harvested wheat at a field in Punjab.—Reuters Photo
Farmers carry newly harvested wheat at a field in Punjab.—Reuters Photo

As Punjab starts adjusting to new wheat support price of Rs1,200 per 40kg, it has triggered flour prices burning in the country. In the last three weeks, the flour prices have touched Rs40 per kilogramme — up Rs8 or 25 per cent in less than a month’s time.

This escalating price is unaffordable for more than 50 per cent people already living on or below the poverty line. It would push a few hundred thousands more towards poverty, hunger and food insecurity.

To make the matter worse, the trend is expected to continue till March as Punjab and other federating units pass on the remaining effect of the new price.

Inadvertently though, it was Punjab that set the trend of high wheat price in October last when it announced liberal wheat release in five divisions.

Instead of restricting releases to the millers, it offered wheat to anyone and everyone at a subsidised rate of Rs1,075 per 40kg. It not only defeated the purpose of wheat subsidy, but also rigged the market.

With all other federating units in gross deficit, wheat not only slipped through provincial borders but it also developed a manipulated wheat market. Despite warnings and watching the price trend, Punjab stuck to its policy of liberal release.

The province’s plea that it has to clear its own stocks of 4.7 million tonnes, which was costing it heavily in terms of markup and administrative charges made sense when taken out of context. But it negatively affected the market.

Its wheat releases doubled, touching a whopping 37,000 tonnes a day, with most of it disappearing in hoarding or slipping through the borders to Afghanistan. Had the entire wheat been grinded, the flour prices could have remained under control in the country. But it was wheat being hoarded that hiked the flour prices.

As the wheat price hike was already well underway, the federation announced a new price of Rs1,200 per 40kg in November, providing hoarders an additional incentive — stock wheat for next three months and make a windfall.

The prices in Khyber Pakhtunkhwa, Balochistan and some parts of Sindh skyrocketed — providing more financial incentives to millers and traders.

At one point, the differential between Punjab and Khyber Pakhtunkhwa was Rs170 for a 20kg bag.

Naturally, the major releases flew to markets, where they made more money.

With winter snow blocking Tajik and Uzbek borders of Afghanistan, wheat and its products went deeper into Afghanistan, leaving major areas of Pakistan with increase in flour prices.

Later, in order to avoid hemorrhage of stocks, Punjab decided to put an end to liberal releases and rationed supplies to the millers, leading to fresh increase in price in other provinces.

The new release price, which came into effect in the first week of January, was Rs1,125 per 40kg — a straight increase of Rs1.25 per kilogramme in wheat cost.

The cumulative market increase was more than Rs2.5 per kilogramme in flour, or Rs50 per 20kg bag.

Punjab still plans to increase release price of wheat by Rs75 in next three months (at a rate of Rs25 per month), which in market terms means, another increase of Rs150 per 20kg bag.

It would take flour price in Punjab closer to what it is now in other provinces (from Rs650 to Rs800 per 20kg) and more than Rs1,000 per 20kg in other provinces.

Another contributing factor to this situation has been the role Pakistan Agriculture Service and Storage Corporation (Passco).

It has been sitting on more than 2.2 million tonnes for the last many months despite deficit in three federating units and price escalation.

It had export order from Iran for a million tonnes, which leaves it with 1.2 million tonnes that it could, rather should, have released in the domestic market.

Out of that one million tonnes, it was supposed to send 100,000 tonnes as first installment, which it has not been able to do so far. It is still keeping the entire stocks, with flour prices rising.